Do the differences in legal systems hinder international enterprises’ debt financing?

Jin-Meng Wang and Teng Yuan Cheng

The North American Journal of Economics and Finance, 2023, vol. 66, issue C

Abstract: This study examines the impact of the differences in the legal system concerning obligation claim rights between host and multinational enterprises' (MNEs) home countries on bank credit financing by constructing a legal system distance index including four dimensions. Using 57,526 firm-year panel observations of 7,257 firms from 53 countries operating in China, the results find that legal system distance has a negative impact on foreign firms' debt financing. The influential mechanism is due to the increasing transaction costs. Further test finds that the negative effect declines as the cultural differences increase. The heterogeneity analysis finds that the negative impact of the legal system distance on the debt level is more pronounced for those foreign firms with a large scale, short operating age, not enough collateral, and sales in the domestic market, but shows no significant differences between a sole proprietorship and joint ventures. This study not only expands the literature on “Law and Finance” but also provides an implication for foreign firms' debt financing in the emerging host country.

Keywords: Legal system distance; Multinational enterprises (MNEs); Debt financing; Transaction costs; Obligation claim rights (search for similar items in EconPapers)
JEL-codes: F34 K40 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:66:y:2023:i:c:s1062940823000293

DOI: 10.1016/j.najef.2023.101906

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